retirement plans

5 Important Sources of Retirement Income

Before we begin to transition into retirement, we need to make a few difficult decisions. In the best case scenario, you have the opportunity to participate in an employer sponsored savings plan and have little cash left over to invest on your own. If you don’t have that opportunity, you will still have a couple of retirement income options. As you develop your retirement plan, ensure that you consider these potential sources of retirement income.

Government Sponsored Retirement Plans

I’m sure that most of you are familiar with Social Security. It is probably the most popular and controversial Federal program. If you have worked in the past few decades, chances are that you have already paid your fair share of Old-Age, Survivors, and Disability Insurance (OASDI or Social Security) tax.

This tax can be described as an automated savings plan (ignoring the complexity of Government programs) for retirees, spouses and individuals with disabilities. At the age of 62 you will be able to start receiving benefits. This income source is usually the foundation of most retirement plans.

Corporate Sponsored Retirement Plans

There are many different employer sponsored retirement plans. The long list includes 401(k)s, stock bonuses, profit sharing and defined benefits plans. It’s advantageous to take advantage of as many employer sponsored retirement plans as you can. This is due to the fact that these usually have notable tax benefits.

In addition the savings are automatic and can sometimes be hassle free. Due to the tax advantages of these plans, there are usually strict rules on how and when the benefits can be used. Regardless, these provide a great income source during retirement.

Individual Retirement Plans

In addition to Government and Employer retirement plans, you should also decided to take matters into your own hands and utilize a few common retirement plans. Like employer sponsored plans, these options are regulated, have tax advantages (depending on your financial situation) and come with income withdraw rules. Individual Retirement Accounts (IRAs) is and example of an individual retirement plan.

You can contribute up to $5,000 if you are under 50 and up to $6,000 if you are 50 or older every year. Over time, these accounts could grow to a nice financial safety net and eventually help to supplement other retirement income sources.

Individual Investment Accounts

Another great source of retirement income is your own personal investments. You should make the effort to build and grow a diversified portfolio of stocks, bonds and other assets. Once you get close to retirement age, its important to ensure that your individual investments are less volatile (i.e. higher bond allocation).

Your personal portfolio has significantly less restriction than other retirement income sources. This is due to the fact that you are investing after-tax income, thus they provide very limited tax benefits. In retirement your personal portfolio can be converted to an annuity, which would provide a steady stream of income during retirement.

Employment During Retirement

In addition to all of the important income sources above, you may also choose to fund your retirement through additional employment. Many people choose to stay in the workforce to a certain extent during retirement. Part-time employment can not only provide a paycheck, but can also help keep you active and engaged in your community.

There are many different sources of retirement income to choose from. However, its important to start early and take advantage of the Government and Employer programs available to you. Remember not to rely too much on these sponsored plans as they can change as quickly as the political environment. Make sure you are saving a little extra money and invest in your future.

A Few Common Retirement Plans

In order to ensure that we have enough capital to fund our retirements, its important to understand what types of retirement plans are available. Many retirement plans have some sort of connection to Federal law. In most cases this is due to how they are treated for tax purposes.

As with anything that is involved with law, the rules and characteristics of these retirement plans can seem complicated and tricky. However once you get past the industry jargon, the benefits of these plans are easy to understand.

Government Sponsored Retirement Plans

Social Security - Without a doubt, Social Security, is the most popular and common retirement plan. This is due to the fact that, without a choice, most of us pay into Social Security through paycheck deductions. In light of this, we are all invested in the “health” of the Social Security Program.

Corporate Retirement Plans

401(k) - Investment contribution plans, such as 401(k)s, have increased in popularity over the past few decades. This is mainly due to employer’s shift from offering defined benefit pension plans to tax advantaged contribution retirement plans. This plan offers a tax-deferred contribution to an investment account by the employee and an optional employer matching contribution as well.

Profit Sharing Plan - Like the 401(k), Profit Sharing Plans is an defined contribution plan and allows an employer to make tax deferred contributions to an employee’s retirement fund. One common misconception is that the company has to make a profit in order to contribute, which is not accurate. However there is a contribution limit of 25% of total eligible employee compensation for the year.

Defined Benefit Plans - In addition to contributing to an employee’s retirement account, employers can decide to provide a defined benefit retirement plan. With this type of plan, an employee is guaranteed a specific benefit after retirement. The benefit can be calculated by a specific dollar amount or a percentage of compensation.

Individual Retirement Plans

Individual Retirement Accounts - There are many advantages to contributing to an IRA. The main benefit concerns tax treatment, which varies between traditional and Roth IRAs. There are limits to the ability to benefit from the use of IRAs. These limits include participation in other tax-qualified retirement plans and compensation thresholds.

Keogh Plan - Keogh Plans are a little less popular than the other retirement options. This is due to the fact that Keogh Plans were created to provide tax-deferred retirement benefits to the self-employed and sole proprietorships. Keogh plans can be structured a few different ways to include a money purchase arrangement, profit sharing and defined benefit.

When it comes to retirement plans, there are plenty of different options to choose from. Most of these plans have similar benefits, as many of them boast tax advantages. Regardless what plans are available to you, the key is getting started early and maxing out your contributions.